The Uruguay Banking Crisis was a major banking crisis that hit Uruguay in July 2002. In this, a massive run on banks by depositors caused the government to freeze banking operations. The crisis was caused by a considerable contraction in Uruguay's economy and by over-dependence on neighboring Argentina, which experienced an economic meltdown itself in 2001. In total, approximately 33% of the country's deposits were taken out of financial system and five financial institutions were left insolvent.
According to many sources, the banking crisis could have been avoided if Uruguayan authorities had properly regulated its banks. The Central Bank of Uruguay had trusted international banks to regulate themselves properly and was too lenient and slow in responding to the crisis
3.1 Interbank
In banking, managing liquidity is one of the main responsibilities. The bank has to ensure that it can meet the obligation when they come due without incurring unacceptable losses. For a particular bank, clients‟ deposits are its primary liabilities (tend to be liquid and on the short term based), whereas reserves and loans are its primary assets (tend to be illiquid and on the long term based). Banks can generally maintain its reserve or liquidity requirement, as it is required by the supervisory. Nevertheless, lack of liquidity can be remedied by raising deposit rate and effectively marketing deposits products, selling loans and borrowing from central banks or from other banks in the interbank lending market. The interbank lending market is a market in which banks extend loans to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight (it is also called overnight rate)17.
The role of interbank plays an important function in helping a particular bank comply with its liquidity requirements. The interbank market allows